4 Experts Advise Investors on Greek Debt Crisis

Vanguard’s Davis, BlackRock’s Koesterich and more commented on Greece’s debt crisis and what it could mean for investors

Joe Davis of Vanguard. Joe Davis of Vanguard.

It’s what every investor is talking about: Greece.

On Tuesday, four market experts around the U.S. each commented on Greece’s debt crisis and what it could mean for investors.

It’s been a swift downfall of events leading to Greece missing a 1.6 billion-euro loan payment due Tuesday to the International Monetary Fund.

Greek prime minister Alex Tsipras' announcement of a referendum was followed by the Eurogroup announcing that the program of financial support due to expire on Tuesday would not be extended.

Then, the ECB announced that it will not increase the lifeline emergency funding that has largely funded depositors’ withdrawals from Greek banks.

Following that, the Greek banks and stock exchange were closed on Monday and will likely remain closed all week. And, in response, the global markets roiled on Monday.

Meanwhile, Tspiras requested a new, two-year deal from the eurozone on Tuesday afternoon, only to be shut down by Chancellor Angela Merkel of Germany.

On Wednesday, Tspiras agreed to its creditors' terms, but with some conditions. It is unclear whether the referendum will move forward.

Here’s a roundup of what the global macroeconomic experts are saying:

James Shelton, Kanaly Trust

For James Shelton, chief investment officer of Kanaly Trust, the situation in Greece is very much a “sit and wait” situation.

“I suspect that they are going to find some way to find some sort of an agreement that gets the situation taken care of for a few months,” Shelton said during a phone call with ThinkAdvisor. “Or, you could just as easily have no deal, a default, and maybe Greece gets kicked out of the euro.”

What Shelton cares about is how this affects the U.S. and global markets.

“It’s likely to have little impact, certainly on the U.S. economy, and I think they’ve been working in Europe to isolate this to Greece so there’s not any contagion to other countries,” he said.

His advice right now for clients is to “don’t do anything and see how this plays out over the next few days.”

Kanaly Trust, which runs globally diversified portfolios of several different asset classes, has built into its diversified portfolios some assets that will help cushion the downside of global equity markets, according to Shelton.

“If your portfolio is constructed in that way, I don’t think there’s any reason at this point to do anything with your portfolio and quite frankly I don’t think you need to be all that concerned,” he said.

He does say that investors with significant exposure to Europe, and especially European financials, may have reason to be concerned.

“In a default scenario my guess is that European financials in particular are going to go down,” he said. “But, absent that, if you’ve got a diversified portfolio, I would sit tight.”

Shelton does see positives coming out of the Greece situation.

“If there is a default and we see global stock markets sell off a little bit I believe it’s going to be more of a buying opportunity for the longer term investors,” he told ThinkAdvisor, adding, “If on the other hand there is a last market deal and the markets have a relief rally … we will have removed one of the big risk factors out there and it will probably make a lot of investors more comfortable in investing in the equity markets.”

Joe Davis, Vanguard

Joe Davis, Vanguard's global chief economist, says there was existential threat that the euro would break up back in 2011, but now he believes “it is nowhere near the risks we faced in 2011.”

Davis weighed in on Greece’s debt crisis during a live webcast from Vanguard on Tuesday afternoon.

He outlined four reasons why he believes the euro is not going to break up:

  1. The ECB’s undertaking of quantitative easing.
  2. The European economy, although not fully recovered, has made significant progress.
  3. The peripheral economies (like Italy and Spain) have repaired somewhat. They’re not retracting at the pace they were in 2011.
  4. The banking system in Europe has significantly reduced its exposure to Greece debt.

“If you ask Greek citizens, they want to be a part of the euro,” Davis said.

However, he added that there’s a “55% chance that Greece remains in the Euro,” which means there’s still a big percentage that they won’t.

When asked how much exposure Vanguard funds have to Greece, Davis said there’s zero exposure.

“The headlines we’re seeing today are no surprise to Vanguard,” Davis said. “This is perhaps the most anticipated default, should Greece default [in history]. This is not unbeknownst to many investors.”

Russ Koesterich, BlackRock

Several factors are dampening investor sentiment and causing the U.S. equity market to remain stuck in a “fairly narrow trading range since February,” according to Russ Koesterich, global chief investment strategist of BlackRock.

“The most obvious one is Greece,” writes Koesterich. “While last week initially provided some hope that Greece and its creditors were moving closer together, market expectations for a quick resolution took a nosedive over the weekend.”

In BlackRock’s Weekly Commentary Overview, Koesterich says that the Greek referendum to be held Sunday will be a pivotal risk moment.

“Our base case remains that the European authorities will make every effort to minimize contagion and that the impact on other European financial markets, beyond short-term sentiment-driven markdowns, is limited,” he says.

David Wright, Sierra Investment Management

“In our view, the impact on the U.S. economy or the U.S. stock market is very likely to be trivial to none,” writes David Wright, managing director and co-portfolio manager at Sierra Investment Management, in his latest commentary.

Nevertheless, the U.S. stock market indices were down significantly on Monday, with 95% of trading volume on the New York Stock Exchange to the downside, which Wright says was “the strongest measure in over three years.” He also adds that more than 90% of issues traded were negative, which was the most in two years.

Wright notes that it’s possible that for other reasons the U.S. stock market may finally be completing a cyclical top in May and June.

“Stock markets do not always need a catalyst to start a downturn, but clearly the situation in Europe has caused at least a temporary fear episode in much of the developed world,” Wright says.

He adds that only time will tell.

“It is early days in what is likely to be months of turmoil in Greece, but we expect the dip in U.S. stocks relating to this situation to be temporary and modest, although for other reasons Monday’s decline may be a part of the early phase of a more significant multi-quarter decline,” Wright writes.

What does all this mean for Sierra’s portfolios?

According to Wright, Sierra’s exposure to U.S. and global common stocks is very low, and its current allocations to high-grade bonds, including municipals, is higher than usual. “Some holdings, such as Vanguard Wellesley Income, have dipped enough to hit our trailing stops and we are selling,” he adds. “But we are looking to place cash into asset classes that will rise during periods of fear and uncertainty.”

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